ROI

In the Berkshire Hathaway Annual Letters, ROI is tagged by Kyle against the measure Warren Buffett treats as the real test of a business: “earnings on equity capital employed.” For Buffett the headline question is not raw earnings growth but the return generated per dollar of capital put to work — the lens through which he judges whether a business has “excellent economics” and whether management is allocating capital well.

Context: Return on investment (ROI) and the closely related return on equity (ROE) measure profit relative to the capital deployed to produce it. Buffett’s emphasis on return on equity capital employed over absolute earnings is a hallmark of his value-investing framework.

Where this appears

• Berkshire Hathaway Annual Letters — ROI as “earnings on equity capital employed,” Buffett’s preferred test of business quality and capital allocation